FINANCIAL INSTRUMENTS

IFRS 9

Finance and Accounting Department

Bogotá D.C., April 2018

1. Classification.

2. Measurement.

3. Impairment.

4. Hedge Accounting.

5. Analysis Colombian Central Bank Financial

instruments.

Schedule

The purpose of this presentation is to explain in a general

way

which are the main changes on financial instruments and

identify their impacts on the financial statements for the

Central Bank.

IFRS 9 “Financial Instruments,” introduces changes starting

2018 related mainly with:

• Financial Instruments classification

• Impairment of financial instruments based on “expected

credit losses”.

• Hedge Accounting.

Objetives

Classification and Measurement.

Classification of Financial Instruments

The new IFRS 9 includes a third category , regarding the last one version.

In the new one, the classification depends on:

1. The business model assessment used to manage the financial

instruments, in order to generate cash flows.

2. Whether financial assets generate contractual cash flows

The IFRS 9 categories are:

i) Amortized cost.

ii) Fair value through profit or loss.

iii) Fair value through other comprehensive income (equity).(New

category)

Classification of Financial Instruments

Type of financial instruments Classification

Assets held to collect (i) contractual cash flow and (ii) selling it before its maturity, but not in a

short term.

Assets held to collect contractual cash flows lifetime more than sell it before its maturity.

Fair value through Other Comprehensive Income

(Equity).

Amortized cost (maturity)

Cla

ssif

icat

ion

Assets for sale in a short term and used to collect benefits from changes in fair value.

(Held for trading).

Fair value through profit or loss (P&L)

(Marketable)

Classification of Financial Instruments

Classification Initial measurement Subsequent measurement

Assets measured at fair value through other

comprehensive income (equity).

Assets measured at Amortized cost

(Effective interest method)

Fair value plus transaction costs

Fair value plus transaction costs

Fair value/ amortized cost (effective interest rate)

Measure impairment based on expected credit loss

Amortized cost–Effective interest method.

Measure impairment based on expected credit loss .

Financial Instruments will be measured according to: 1. On initial recognition to Fair Value.

2. After initial recognition will be measured according to their classification:

Amortized cost (Effective interest method- IRR)

Fair value, through profit or loss, or through other comprehensive income (equity).

Assets measured at fair value through profit or loss

Fair value Fair value

Measuring Impairment.

Measuring Impairment

Although, IAS 39 was based on incurred credit loss model; the new IFRS 9

version has introduce a forward-looking expected credit loss model;

meaning that it requires an entity recognizes its expected credit losses

along the financial assets lifetime that has increased significantly their

credit risk, since initial recognition.

Expected credit losses Incurred credit losses

Not recognized until a credit

loss event occurs .

“too late”

“Expected credit loss” is

recognized at origination.

Impairment loss recognition

for default events that are

possible within the next 12

months.

Ve

rsu

s

Impairment

The guiding principle of the expected credit loss model is to reflect the general pattern of deterioration or improvement

in the credit quality of financial instruments. The expected credit loss approach has been commonly referred to as the

three-bucket approach, although IFRS 9 does not use this term.

12-month expected credit losses.

Significant evidence of default for the next year.

Full lifetime asset credit risk.

Hedge Accounting

Hedge accounting requirements in IFRS 9 are

OPTIONAL. When an entity first applies IFRS

9, it may choose to continue to apply the hedge

accounting requirements of IAS 39, instead of

the requirements in IFRS 9, to all of its hedging

relationship.

Banco de la República does not apply

hedge accounting

Main differences between IFRS 9 – IAS 39

Analysis of Colombian Central Bank

Financial Instruments.

Financial assets assessment under IFRS 9

IR are assets that belong to the nation and are

held in foreign accounts , but they are under

control of Colombian authorities. They can be

used in any time to correct imbalances in the

balance of payments, through Central Bank

market operations.

CLASSIFICATION

Fair value through OCI

Fixed income instruments represent 95% of

the IR investment´s portfolio (Bonds,

comercial and discount papers and CDs).

They fulfilled the requirements of this

category.

Fair value through P&L

They are financial assets that do not have

contractual cash flows or their lifetime is

less than one year.

Portfolio

International

Reserves(IR).

Previous category

Fair value

through profit

or loss.

New category

Operational Impacts

Legal constraints

Colombia’s Central Bank Act. stablishes in its “numeral 4 del artículo 62 del

Decreto 2520 de 1993 (modificado mediante el Decreto 2386 de 2015)” as

follows:

"4. International Reserves must be recorded by mark-to-market calculations.

The Foreign exchange adjustment for international reserves due to

fluctuations in exchange rates COP vs other currencies should be recorded

as a surplus. Losses should be applied in this surplus. Fluctuations in the

market value of the international reserves portfolio will be recorded as

Central Bank´s profits or losses.”

Financial assets assessment under IFRS 9

These securities are purchased under resale

agreements according to the monetary policy

by the board of directors and for this reason,

they are not subject to maximum return

constraints, so it is not necessary to hold them

until maturity, but they are used to provide

liquidity to the financial system.

Classification

Fair value through other comprehensive

income (FVTOCI)

It has implicit contractual cash flows

Portfolio

Monetary

policy TES.

Previous category

Fair value

through profit

or loss.

New category

Financial and Operational Impacts

Financial Impacts

Profit and Loss Impacts for the new measure implementation

Note: Data displayed corresponds to both annual flows and yearly portfolio accrual.

Previous treatment

(1)

P&L

(fair value)

OCI (Equity)

(a)

(2)

P&L

(Amortised cost)

(b)

Total

(a) - (b)

International

ReserveMillions USD $ 39,122 298 (34) 332 298 (34)

Monetary policy TES Billion Cop $ 8,893 1,007 354 654 1,007 354

Porfolio

Fair value through profit

or loss Fair value through Other Comprehensive Income

Year 2016

Currency

Fair value at

the end of

period

Assessment of new requirement under IFRS 9

Impact on

profit and loss

(2) - (1)

Operational Impacts

Effects of the new classification

1. Legal constraints analysis over international reserve portfolio.

2. Adjustment of IT software in order to calculate amortised cost (accrued interest

measure by IRR) and new accounts opening.

3. Definition and parameterization of new accountancy schemes for implementing the

new accountancy policy retrospectively and its manages starting up January 2018.

4. Implementation of the expected loss model with all categories of financial

instruments classified as: (i) amortised cost and (ii) fair value through other

comprehensive income

Thank you